Damaged Reputation

The threat of a damaged corporate reputation ranks among the top priorities of executives, but a true risk transfer program to mitigate the risk is virtually unheard of, delegates at the 2008 RIMS conference in San Diego, California were told.

Michael Jones, Kilburn Jones & Gill LLP, James Kirtland, ING, and Bruce Abrams, AIG, hosted the seminar, “Reputation Risk, the Hidden Risk,” at the year’s conference.

More than half of the CEO respondents in a 2005 Economist Intelligence Unit survey also placed reputation risk as the top risk facing their organizations, but a 2008 Corporate Executive Board survey found that 52 per cent of respondents have no strategy in place to address the risk, Jones said.

“We all know that insurance is available for the ancillary effects of the reputation risk — for things such as extra expense, business continuity, lost income etc. — but there is nothing actually available to repair a company’s reputation,” he continued.

CEOs, CFOs and risk managers in the Economist survey identified security breaches, unethical practices and regulatory non-compliance as the most serious risks to a firm’s reputation, Jones said.

With this in mind, it is imperative that corporations develop clear and comprehensive communication plans and strategies before an event occurs that may damage an organization’s reputation, Kirtland said.

“If you have no strategy to manage reputation risk then your company can only react to an adverse reputation event and that has the potential to end very badly,” Kirtland continued.

By properly training an organization’s leadership to respond quickly and appropriately following an event that may lead to a damaged reputation, companies can save potentially millions of dollars, Abrams contended.

To formulate an effective plan, a communication strategy must be in place before an event occurs, so that a consistent, well-thought-out message is delivered following an event. While it is imperative for management who will serve as the company mouthpiece to be well-versed in the plan, it is also imperative that the entire organization be onboard and made aware of the strategy, Kirtland stressed.

“Your stakeholders want to see leadership under stress,” Abrams said. “Good leadership may be rewarded, poor leadership is quickly punished.”

It is up to the risk manager, he continued, to provide management with the necessary tools to respond quickly. “Recovery can be short if you have anticipated events, but if you are doing it after the event, then it’s too late.” The difference between recoverers and non-recoverers can be billions of dollars in market capitalization, Abrams warned.

Senior executives that respond immediately with compassion, empathy and humility may speed the recovery from the loss and improve the organization’s capital value in the long run. He cited an example of an airplane crash where the CEOs of the airlines involved each had different responses. As a result of the different reactions — one humanistic, the other overly defensive — the airlines have experienced different levels of damage done to their respective corporate reputations.

“Following the July 25, 2000 crash of Air France’s Concorde jet in Paris, the CEO of that company went immediately to the airport where he expressed humility, compassion and sympathy to the families,” Abrams told delegates. “The CEO of British Airways (which also had a fleet of Concorde jets at the time) gave a press conference at the same moment and suggested that debris on the runway was the cause of the crash and that it was not the aircraft’s fault.”

This is a perfect example of one organization being overly defensive and the other reacting with compassion, he continued. Since then, Air France’s capital value has increased 40 per cent and British Airways’ has decreased 20 per cent.

“A damaged reputation can cost an organization billions of dollars and there’s no insurance coverage for loss of reputation,” Abrams warned. “Keeping that in mind, it is crucial to pre-plan and have a communication strategy in place before an event hits.”